Our boilerplate introduction to Mr. Bassman starts with his definition of convexity:
...Wall Street loves to make convexity sound complex (I suppose it’s so they can charge higher fees?). We speak Greek (calling it “gamma”), employ physics as a metaphor (analogizing to it “acceleration”), and use mathematical definitions (since it is the second derivative of the asset’s price change).
Pish, posh. An investment is convex if the payoff is unbalanced for equally opposite outcomes. So if there’s the potential to earn a profit of two on a bet versus a maximum loss of one, the bet is positively convex. If you can lose three versus making two, it is negatively convex. That’s it. The rocket scientists are called upon to help (fairly) price the cost (value) of such possible outcomes. This is why the expansion of derivative trading in the 1990’s resulted in a hiring spree of physics PhD’s....
"Pish. Posh." is a technical term only used by market professionals for those situations where one has decided to go full Alinsky rule #5:
#5 Ridicule is man’s most potent weapon. It’s hard to counterattack ridicule, and it infuriates the opposition, which then reacts to your advantage...
From the Convexity Maven at Simplify Asset Management, May 11:
Ben Bernanke, the newly seated Federal Reserve Board (FED) governor offered in a November21,2002 speech:
“The U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost.By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”He concluded that an “...anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities...” which could include the “...equivalent of Milton Friedman’s famous ‘helicopter drop’ of money.”
We have a massive debt problem in the US, both public and private; and there are only two paths out of such a situation, either default or inflate, where inflation is simply a slow-motion default.
Morally supported as COVID relief, intellectually under-pinned by Modern Monetary Theory (MMT),financially backed by the FED, and politically expedient for both the Democrats and Republicans, the helicopters have taken flight via twin unfunded Fiscal packages. Moreover, a third helicopter is preparing for take-off clothed in the sheepskin of critical Infra-Structure spending.
As a public policy measure, I support this action; but only because the FED missed the clearly marked off-ramp in 2013 when the bond market’s tear-drenched (100bps)“taper tantrum” crumpled the FEDs resolve.
[Note to millennial parents, this is why you give those brats a time-out, rather than offer ‘dessert as an appetizer’ to soothe their wet eyes.]
Contrary to most pundits, I believe the FED wants a steeper Yield Curve as it not only resolves structural problems,but also it re-balances past mistakes....
....MUCH MORE (11 page PDF)
This is as profound as it is simple and something that any pro should have already internalized.
Continuing with our boilerplate intro to Harley:
...The Convexity Maven is nothing if not a professional. Here is part of his mini-bio at MacroVoices:
Harley S. Bassman
Harley Bassman created, marketed and traded a wide variety of derivative and structured products during his twenty-six-year career at Merrill Lynch. In 1985 he created the OPOSSMS mortgage options product that facilitated risk transmission between MBS originators and financial institutions. In 1988, he assumed responsibility for trading and marketing IO/PO and other levered prepayment securities. Soon after this, he started purchasing RTC auctioned MBS Servicing rights and repackaged them for the securities market as BIGS - Beneficial Interests in GNMA Servicing. Later, he started a GNMA servicing conduit becoming one of the Top 20 originators in 1992. As managing and hedging prepayment risk became a priority focus for the financial markets, Mr. Bassman created PRESERV, Merrill's trademarked Prepayment Cap product. Merrill was a leader in this product category writing protection that covered the risk on tens of billions of notional mortgage servicing rights. Later, Mr. Bassman managed Merrill's initial venture into off-balance sheet mortgage trading.
In 1994, Mr. Bassman assumed responsibility for OTC bond options.
Within a year, Merrill was the leader in this product sector. A wide variety of products were offered including vanilla and complex options on MBS spreads and the Treasury yield curve.
To help clients more fully appreciate Volatility as a primary risk vector, he created the MOVE Index. Similar in form to the VIX Index, it is now the recognized standard measure of Interest Rate Volatility.And so much more, all those cutesy Merrill acronyms can be blamed on him and his team.
From 1995 to 2000 he focused on creating hedge strategies for MBS servicers and portfolio optimization techniques for Total Return and Index investors.
Mr. Bassman became the manager of North American MBS and Structured Finance trading in 2001. During his tenure, he created SURF, (Specialty Underwriting and Residential Finance), a self-contained Sub-Prime mortgage conduit. He supervised the issuance of Merrill’s first Sub-Prime securities. He also transitioned the structuring business to a new technology platform....
